Question

Treasury bonds paying an 8% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually?

Answer 1

8.16%

Step-by-step explanation:

Note that when a bond pays a semiannual coupon, coupon payments are made twice a year, hence, in order to determine its annual coupon rate if the coupon is paid once a year, we need to determine its effective annual rate using the formula below:

effective annual rate=(1+coupon rate/n)^n-1

current coupon rate=8%

n=number of times in a year that coupon payments are made=2

effective annual rate=(1+8%/2)^2-1

effective annual rate=(1.04)^2-1

effective annual rate=8.16%